Nobody wants to compete in a commodity business, where the only path to survival is to be the low-cost provider. But many advisors are heading straight down that poisonous path – driven there by the robo industry that has commoditized investment management. Here’s how to ensure you are not a victim of commoditization.
Charging 1% or 2% annual fees is becoming less and less common. Robo advisors charge between zero and 0.25% annually. If the client wants human interaction, they can choose from the likes of Vanguard Personal Advisor Services and pay 0.30% annually or Schwab Intelligent Advisory at 0.28% annually.
What worked in the past is a thing of the past.
To embrace change, here are 10 ways to differentiate your practice. I’ve taken them from my financial planning practice which, I’ve been told, is about as different as any practice could be. Though all of these aren’t right for every advisor, you can choose which are right for you.
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Hourly fee model. Financial services fee models are moving from commission-based to fee-only AUM models. The hourly fee-only model, however, is rare. The Garrett Planning Network was doing it long before I launched my practice. In 2016, I asked then Vanguard CEO Bill McNabb whether the future of financial advice was going to be hourly and agreed with his response – “it took a long time for the industry to transition from commission to the percentage of assets model and another transition soon was unlikely.”
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Build simple portfolios. Both robo and human advisors build complex portfolios. Why? Because it creates the illusion that investing is complex and shouldn’t be done without expert advice, an illusion with which I completely disagree. I’ve seen very few portfolios outperform the three-fund second-grader portfolio designed with my son when he was eight years-old. Its simplicity is one of the main reasons it is currently the best performer among the 8 Dow Jones Lazy Portfolios. Why then, if simplicity is so awesome, do clients need me? Because there are many complexities in beyond simplicity, such as tax planning, penalties, gated redemptions, etc. It’s not easy to keep things simple.
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Price. Many business schools tell you one should either be the low-cost leader or take a premium-pricing approach that delivers more benefits. Getting caught in between is a bad thing. I disagree. I price my advice at $450 an hour, which is more expensive than any hourly advisor I know, but is well below robo-advisors. That’s because it often takes less time to work on a $100 million portfolio than a $100,000 portfolio. A client who has sold their business and has all assets in cash often requires a simple plan and my one-time fees are a small fraction of what most robo-advisors would charge. But I can’t offer cost-effective help to someone with relatively little money in complex insurance products, though sometimes I will help out on a pro-bono basis.
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Anti-sales. A very long time ago, I worked for McKinsey and Company, a management consulting firm. In working on a client proposal, I used the word “sales” to a partner and was politely counseled never to use that word again. It’s about showing the client the value they will receive. Then, a decade or so ago, I attended a continuing education class where the marketing instructor stressed that the key to landing a client was making an emotional connection and getting them to sign on during the first meeting. The implication was not to give the client time to think about the value they will receive or anything else for that matter. That approach is based on behavioral economics which Nobel Laurate Danial Kahneman calls “system one” and “system two” thinking. System one is basically emotions and quick for our brains to process, while system two takes more effort to kick in as it’s based on logic.
I flip the script. If, during the 20-minute call, a potential client says they want to move forward, I insist that they think about it for at least a day before getting back to me. I let them know this is a critical decision and not to act instinctively.
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Guarantee. From the very first client I took on, my advisory agreement has stated that the client has the unilateral right to not pay for the plan if they didn’t feel they received value. Further, they pay nothing until the plan is done. I’ve not had a single client exercise the right to not pay for a plan. I didn’t offer this guarantee to be kind. It lowers the barriers for a client to move forward since they don’t have to worry about me providing a poor plan or billing them for more than I estimated. I have nothing to lose. If I didn’t have this guarantee, it would be horrible for my reputation to sue someone who didn’t want to pay.
Again, all of these differentiators aren’t going to be a fit for all advisors. But recognize that you are in a commodity business and clients are going to migrate to lower fees. If you are using the same sales tactics as everyone else, ask yourself why the client would select you?
Allan Roth is the founder of Wealth Logic, LLC, a Colorado-based fee-only registered investment advisor. He has been working in the investment world with 25 years of corporate finance. Allan has served as corporate finance officer of two multi-billion dollar companies, and consulted with many others while at McKinsey & Company.
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